A COURT in the US has found against the healthcare and pharmaceutical multinational Schering-Plough in a case involving a $473 million (€322.8 million) tax charge on funds generated in Ireland.
The tax charge was imposed by the US Internal Revenue Service on Schering in 2004 in relation to earnings in 1991 and 1992, and was appealed by the multinational.
However in a recent ruling in the courts in New Jersey, US District Justice Katharine Havden found against Shering.
The court had to rule on whether the payment by offshore subsidiaries of €690 million to the US parent was a loan from the subsidiaries – which would have created a tax charge – or a payment for the assignment of future income streams to the subsidiaries as part of a complicated structure involving interest rate swaps with a third party.
This practice would not have created a tax charge.
The court heard that a Schering-Plough subsidiary in Switzerland, Schering-Plough Ltd, conducted significant manufacturing operations in Ireland due to the favourable corporate tax rate for manufacturers in Ireland in the early 1990s.
By the end of 1991 the Swiss subsidiary had accumulated $829.7 million of largely untaxed cash from its operations in Ireland.
“Schering-Plough wanted to use the mostly untaxed offshore Irish cash in the United States for multiple purposes, including RD programmes, normal operating expenses, and particularly a $1 billion stock repurchase programme,” Judge Havden wrote in her judgment.
The multinational consulted Dutch bank ABN and its principal financial adviser, Merrill Lynch. Merrill Lynch advised a scheme involving lump sum payments associated with interest rate and currency swap contracts that would last for 20 years.
Schering’s independent auditors Deloitte Touche approved the scheme, saying the transaction was a means of “repatriating money from Europe without having it taxed as a dividend”.
When the IRS examined the transactions in later audits it found differently. In a notice issued in April 2004, it determined that the “substance of the transactions” was not “consistent with the form of these transactions, and that these transactions lacked economic substance”.
It found that the transfers were either loans or constructive dividends, and raised a tax charge which Schering paid under protest and then appealed.
Among the material considered by the court was an internal ABN document which said: “The reason for this structure is the fact that the parent through this mechanism receives a 20-year amortising loan from its subsidiary without incurring any negative tax implications in the US.”
An internal Schering note by Daniel Filiberto, the multinational’s director of financial reporting and compliance, read: “We are really accounting for the net deferred income as a loan, but tax could not have us record it as a loan.”
The judge noted that other Schering documents refer to the transactions as “sales”, as did Schering witnesses before the courts. “But calling a club a spade does not make it one. Permitting a taxpayer to control the economic destiny of a transaction with labels would . . . exalt form over substance, thereby preventing the intention of the tax code.”
She found the transactions were tax vehicles “lacking legitimate business reasons” other than the avoidance of tax.
US spokesman for Schering, Fred Malley, told The Irish Times: “We disagree with the court’s decision and are considering our options, including appealing the decision.”
Schering-Plough employs more than 1,000 people here. It has an animal health products plant in Bray, Co Wicklow, where 240 people are employed. Earlier this year it announced it was to close the plant by mid-2011.
At the time, the company, which has other plants in Rathdrum, Co Wicklow and in Cork and Dublin, employing more than 1,000 people, said it remained committed to Ireland.
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